Investing in traditional asset classes can sometimes feel like building a house of cards, with market volatility and unforeseen economic events posing a constant threat to the stability and value of the portfolio. For instance, the stock market is inherently volatile, and investments can experience significant declines in value, sometimes overnight. This can result in a loss of significant capital, making low-risk investing challenging.
Traditional assets like stocks and bonds are subject to inflation risk, which can significantly reduce their purchasing power over time. If your investment portfolio is not diversified with alternative assets, it may not be able to keep up with inflation.
Many traditional asset classes rely heavily on a small number of companies or industries. This concentration risk can lead to significant losses if those companies or industries experience financial troubles or regulatory issues.
Interest Rate Risk
Traditional assets such as bonds are highly sensitive to interest rate changes, which can significantly impact their value. For example, when interest rates rise, bond prices typically fall, leading to losses for investors.